GAAS panelists weigh in on private equity's role in the aftermarket

Why are private equity firms targeting the automotive aftermarket? Dan Smith, president of Capstone Financial Group attempted to answer this question during the 2008 Global Automotive Aftermarket Symposium (GAAS) with an illustrious group of panelists who know the private equity sector inside and out. Smith's guests included Paul Cifelli of Kinderhook Industries; Kristin Newhall, a partner with The Riverside Company; and Jeremy Thompson, a partner with ONCAP.

Before introducing his panelists, Smith answered his own question.

"It's hard to find an industry where the demographics are better," he says. "Plus, the automotive aftermarket is relatively recession resistant and has had a strong track record of growth for the last 20 years. In addition, an automobile is the second largest personal purchase that people will make in their lifetimes, and the strong hobbyist and enthusiast market makes it very attractive to private equity investors."

According to Smith, the aftermarket has been transformed by the vast amount of capital pumped into it — for better or for worse. Some of the most noticeable effects of this capital is that it has changed the industry's manufacturing base, and given suppliers the ability to go overseas. This, in turn, has broadened the industry's distribution base and given distributors the ability to buy their way to the next level of distribution. In short, private equity has changed the way both manufacturers and distributors go to market.

"Financial buyers have widening scope, are crossing distribution lines and are morphing into strategic buyers," Smith adds. "Capital has gained a foothold, and there is not a person in the industry who has not been affected by private equity."

Cifelli, who has been aggressively investing in the aftermarket since the early '90s, says Kinderhook Industries sees a lot of value opportunities in the aftermarket industry. The company is currently pursuing a number of transactions, and sees the looming trends as exciting — and calls the aftermarket's future "bright." He also sees “green” technology businesses as growing in popularity within the near term.

"Green is a reality today. For us, it's a big initiative. We are very interested in green. It's a big push for us, and has given us the ability to win business in both the U.S. and Canada," he adds.

Cifelli touts his company's purchase of KN Rubber as a "green" investment. KN Rubber uses recycled tires to produce floor mats, and is aggressively marketed by Kinderhook as a green business.

Thompson agrees that green is a growing concern for private equity companies. He cites ONCAP's purchase of Mr. Car Wash as a green purchase, which — although not necessarily marketed as such — still places them solidly in an eco-friendly camp.

"Mr. Car Wash is actually a green company. Washing your car in your driveway uses more water than washing it at a car wash. Because of this, many municipalities have prohibited residents from washing cars in their driveways. On the other hand, a car wash has the ability to reclaim water and soap. Some are even putting in solar panels. From that perspective, a car wash is green," he says.

Consolidation is another reality facing private equity firms investing in the aftermarket today. Newhall says that consolidation among buying groups gives better leverage in terms of pricing, which ultimately fall to the consumer. For the private equity firms that buy and consolidate distributors, their prime objective is to build up brands and establish that distributor as a premier player in the industry. That way, Newhall says, the benefits of running a larger scale organization will ultimately be passed on to the consumer.

"The barriers have been lowered due to the Internet," Newhall adds."Today, two guys in a garage can compete with a larger company because their overhead is lower. But they can only grow so much with that business model. Our position is that we've got the right assets and the right scale to help them continue to grow. We are better at sourcing and better at servicing the customer, which helps companies in the long run."

In short, investors see the aftermarket as a prime place to invest money, mainly because of its stability and diversity. And no matter what you think of consolidation, the private equity companies are here to stay, and remain interested in becoming power players with the ability to influence the changing face of the aftermarket industry today, and in the future.